Growth, Profit & Compensation in Microfinance: How much is too much?

Available Downloads

Discussions over the levels of growth, profit and compensation in microfinance can no longer be avoided. Whilst considered features of a commercially successful business, questions arise as to how responsible the motive for profit is when “all this wealth and compensation comes directly from the pockets of those living at the bottom of the economic pyramid” (Chuck Waterfield, 2012).

Growth, profit and compensation levels may be considered essential for the financial sustainability of MFIs, but how much is too much? “It is time for the microfinance industry to make some hard decisions”.

Chuck Waterfield presents his case in the screencast below, hoping to stimulate discussion and debate on this topic. This can also be downloaded as an MP4 and the slides as a PDF.

What are your thoughts on growth, profitability and compensation in microfinance? Post your comments below!

8 Comments

Thank you for this very thoughtful and personal presentation. The data from Mexico is sobering even having seen similar data before in my work there. We really appreciate the efforts MFT is making to get these messages across.

I share concerns about the levels of profitability. I also appreciate that for some this is a moral issue. At the same time, many of us who have been in microfinance for a long time have sought to bring in capital into microfinance and try as we may it may not be possible to ensure our values are carried forward by all new entrants, or even most. There are many more actors in today’s microfinance than ever before.

“How much is too much” is a good question but is it practical? Perhaps there is there is a different question to ask if we assume that self-restraint or the values of microfinance founders cannot be sustained by all new market entrants. Is there some future market equilibrium or market structure that might deliver responsible finance? If there is, how do we navigate today’s perils towards that future market structure? What examples in other industries or banking evolution are there to guide us through this difficult period?

For instance, does the responsible finance equation change when most poor clients are savers rather than borrowers? What other financial services have grown quickly and settled over time into a responsible market equilibrium balanced through the forces of finance rather than moral suasion alone?

I just wanted to thank all who support this organization and especially Chuck Waterfield for the enlightening presentations posted on the organization’s website. I’ve done some research on microfinance for past school projects including trying to incorporate it into a ‘resolution’ that I was trying to pass during my time as a college student while at a Model United Nations conference in Santa Barbara. As a student at BYU University and as a part of my Political Science 200 class, I’m now doing a qualitative research project where I will be doing case studies between two similar countries where I will study the effects of for-profit microfinancing institutions on the growth of small businesses in these two countries. Anyways, I love what you’re doing and when I have some more time I plan on exploring you website more indepth. Thank you all so much for your humanitarian efforts.

Chuck, Thanks for putting this together. You fill the roll of a Khan Academy for microfinance investors and practitioners. At Kiva, we think the red zone is a > 5% ROA combined with high Portfolio Yield. Today, the average ROA is negative of all MFI partners and the Portfolio Yield is around 36%. I’d like to share your presentation with my colleagues to engage them in how our portfolio stacks up against your Green, Yellow, Red threshold for ROE. Thanks for drawing lines in the sand and moving this conversation forward. I agree that we must look at the question of excessive profitability, in an overall view on institutional performance. Also, I agree with the Rabbi: we are all responsible.

Thanks for this compelling and timely presentation; I’m sorry it took me so long to catch up with it! There are a number of discussions underway about what “responsible pricing” means, and this provides a provocative launch point. I have two questions:

First, isn’t the issue less how much is being transferred from poor to rich than how much the poor are retaining? In other words, if a loan enables a poor person to increase their income by $50, and they transfer $10 to the lender, maybe that would strike many as fair. If they transfer $25, maybe that is a bit rich. If $45 almost certainly excessive. And obviously if more than $50 immoral.

But even if it is well under $50, it is not straightforward to set an acceptable level, if we don’t know the risk. In other words, if there is very low risk or variance in likelihood of the investor getting the $10, that may well be fine. But if there is great uncertainty, then maybe $10 is not enough.

Which brings my second question: not enough for what? Because in the short term, unfortunately, the question may be not what is fair, but whether the poor person is better off than otherwise. In other words, even the $45 example with low risk, while morally repugnant, may be preferable to no loan at all. The poor person is, after all, still $5 better off than without it.

Which I think is the bind we have gotten ourselves into. Unfortunately, all the hard work of the last ten years to broaden the MF investor base has been based on an investment proposition that there are no trade offs in microfinance, and that financial returns need not be compromised by social benefit to clients. Work like your’s and other work on trade offs shows that this central proposition does not hold, so now we are in the position of having to rebuild the investor base on a different proposition. But for the time being, we are stuck with many investors to whom we have committed competitive or maximized returns.

Thanks for your interest in this important topic. I do have plans to write more on this subject, incorporating some very helpful thoughts from a number of other people with whom I have been in dialogue over the past months.